The survey showed that, unfortunately, half of us don’t fully understand what a credit rating is and how it affects our ability to borrow. A third of us have been refused a loan at some point and 40 per cent of those don’t know why.
This simple guide from SmallBusiness.co.uk and Experian separates credit fact from fiction:
Myth 1: Previous occupants at my home affect my credit rating
Research shows that 71 per cent of you believe this – mistakenly. However, the previous occupant of your house or flat could have been a millionaire or a bankrupt but that makes no difference to lenders at all.
What lenders are interested in is your ability to cope with a loan, so they will look at your individual circumstances. If you’ve recently moved, they will want to know your previous addresses, generally for the last three years, so that they can check that you really were living where you said you were.
Myth 2: Family and friends living at my address could harm my credit rating
Until a few years ago, lenders checked the credit reports of others living at your address. They could then take their position into account when deciding whether to offer you credit – and 63 per cent of people in the survey still think that’s the case.
However, this no longer happens. Instead, your credit report contains a section listing your financial associates – people with whom you share a joint account, such as a joint mortgage.
Lenders will look at the credit reports of these people when they assess your creditworthiness. If your associate has a poor credit report, it could affect your chances of getting the deal you want, even if your own record is spotless.
To make sure that you don’t get penalised, it’s important to check that the list in your credit report is correct. It’s also a good idea to get any financial associates to check their own report before you make a new application.
Myth 3: Credit reference agencies decide your credit rating
In fact, credit reference agencies collate the information held in credit reports and hold it securely. This information includes the credit agreements you have, such as credit cards, loans and mortgages, your repayment history and whether you have any court judgments against you or have been made bankrupt.
Lenders use this information, along with your application form, to calculate a credit score – a number that represents the risk that you will not repay what you owe. Generally, the higher your score, the lower the risk you present and the easier you’ll find it to get a good deal.
Myth 4: Your credit rating is poor because you’re on a blacklist
There’s no such thing as a credit blacklist, even though 41 per cent of you blame this if you’re refused credit.
Red-lining – ruling out whole streets or estates – simply doesn’t take place and your credit score does not take account of factors such as gender, religion, race or ethnic origin.
What does count to lenders is continuity, which is why your credit report shows years of your credit history. Lenders want to know how well you have managed your affairs over time because that helps them to predict how you may behave in the future.
One interesting factor that they note, however, is whether you’re on the electoral register. They use this public record of whether you have signed up to vote to check that you are who you say you are and live where you say you live, as a precaution against fraud.
Myth 5: You have only one credit rating
You can have many different credit ratings, depending on who you apply to, what you apply for and your circumstances at the time you apply. Still, 29 per cent of you think that you have a single score that applies to every type of credit.
Every lender uses a slightly different equation to calculate a credit score – some also use different versions for different products. Your credit rating changes when your circumstances change. For example, paying off a debt could improve your score, while missing a series of repayments could damage it.
Myth 6: Past debts don’t count
Unfortunately, they do, even if you’re financially fit today. In this area just 12 per cent believe that an old debt doesn’t matter.
If you have missed repayments in the past, it stays on your credit report for 36 months. With a court judgement, the evidence is there for six years. A discharged bankruptcy stays on record for at least six years but a bankruptcy restrictions order is there for as long as 15 years. Lenders see these and mark you down because they fear you may not honour your obligations.
Don’t panic – you may be able to take remedial action by adding an explanation of the circumstances surrounding any problems to your credit report. For example, you might have missed a few repayments because of illness or an accident. Lenders will see this note and can take it into account.
You can check your credit report for free at www.experian.co.uk